Is Gold Really a ‘Safe-Haven’ Trade?

Market and currency changes provide a glimpse of gold

Europe’s fragile political condition is causing new jolts to its financial plan to end the region’s debt crisis.
The CurrencyShares Euro Trust (NYSE:FXE) and global total Stock Market ETF (NYSE:VT) have been reeling over the past few days. And interestingly, so-called “safe haven” trades like iShares Gold Trust (NYSE:IAU) have joined the decline. Why are precious metals falling and where’s the bottom? Can gold be rightly called a “safe-haven?”

Bullish underpinnings

Falling stock prices and currencies should be, according to theory, the ideal setup for bullish trades in gold. If there’s any time that gold should be shining, it’s when other major asset classes are falling.

Add to these unsettling market conditions, one more bullish factor that favors gold: The Indian government just repealed an excise tax on sales of all gold jewelry. India is the number one gold consumer market and gold is the country’s second biggest imported item after the United States Oil Fund LP (NYSE:USO).

How has gold responded to these favorable conditions? Instead of rising, gold’s reaction to these bullish events has been negative. Even boring long-term iShares Barclay U.S. Treasuries (NYSE:TLT) have outperformed gold over the past 3-months by a whopping 11%!

Why isn’t gold soaring?

Revisiting the safety of metals

Since gold has been sold to as a “safe haven” investment, we must determine what that means.

A safe haven is defined as an investment that is “expected to maintain its value or to increase in value during market turmoil.” Safe haven investments are sought after by investors to protect their capital and to avoid the shock of unexpected events.

As market conditions change – and they always do – the crowd’s perception of what is “safe” versus what is “risky” changes too. These perceptions are molded by previous experiences and do not necessarily hold true in the future. In other words, investments that were christened as “safe havens” during one period aren’t always that way during other periods.

The conventional wisdom that gold will always increase in value when stocks, the CurrencyShares Euro Trust (NYSE:FXE) or other investments fall has been perpetrated by famous gold permabulls everywhere from Singapore to Oconomowoc. And instead of questioning the validity of these good sounding theories, the investing public has blindly accepted them as gospel.

The zero income flaw

Because gold produces zero cash flow, it presents a major conundrum for retirees or anyone whose main investment goal is to generate more income.

While owning physical gold is psychologically comforting there are no guarantees that it will perfectly hedge against future increases in inflation or a currency meltdown.

In fact, gold’s biggest shortcoming is the fact that it generates no earnings, no dividends, and no income. This makes the risk dynamics of gold compared to stocks and bonds strikingly different.

And while a lack of income might not seem like something important to a speculator, it is to everyone else. (The ETF Profit Strategy newsletter’s May Gold Income trade converted this dead asset into a cash cow which vacuumed in $1,200. That’s something not even gold coins – in all their glory – can do.)

Safe haven doubts

The ETF Profit Strategy newsletter keenly observed just one recent example of this among many:

“The 4/4/12 market selloff took the Nasdaq-100 and S&P 500 lower by 1.46% and 1.02% respectively. Instead of behaving in a defensive manner, instead of being a haven of safety, instead of zagging when stocks are zigging – the SPDR Gold Shares (NYSE:GLD) had the audacity to fall 1.68% while the iShares Silver Trust (NYSE:SLV) moxied up a 4.19% loss.”

The fact that precious metals (NYSE:GLTR) have experienced deeper declines than stocks on down days is problematic to the “safe haven” theory.

The ETF Profit Strategy newsletter reports key trading levels for both gold and silver. And if GLD or SLV slice right through the thresholds we’ve outlined without any sort of resistance, both metals could be in for bigger losses ahead.

On the other hand, if they bounce and hold, it might signal a good buying opportunity.